Comprehensive Guide:IRS Form 1099-B

Broker 1099-Bs Are Woefully Inadequate for Taxes

Most traders assume that their brokerage 1099-B includes everything they need to file their taxes, but that is far from the truth.

Traders and investors must generate a Schedule D Form 8949 based on Publication 550 requirements which differ greatly from the requirements brokers have to follow when creating a 1099-B, especially when it comes to
Wash Sales.

In addition, the IRS expects traders to reconcile their Form 8949 with what is reported on their 1099-Bs and make any
necessary adjustments, which can be a monumental task without specialized software.

Why is Form 1099-B Inadequate?

Brokers use a totally different set of rules when calculating wash sales.
The IRS only requires brokers to adjust for wash sales between identical cusips in the same account.
This means YOU are responsible for making all other wash sale adjustments, such as between stocks and options, and across all accounts - including IRAs, as required in IRS Publication 550 for taxpayers.

Short Sales closed at year may not be reported properly.
Brokers are not required to apply the Constructive Sale Rule when reporting short sales on 1099-B.
Brokers generally use the settlement date when closing a short position. However, a few brokers use the trade data when closing a short position. There is simply no consistency in reporting short sales from one broker to the next. Therefore some short sales get reported on the 1099 that do not get reported on Form 8949, while other short sales that are not listed on the 1099 must be reported on Form 8949.

Options and ETFs may have different tax treatment than what is reported on 1099.
A recent article in Forbes magazine highlights just how complex the tax laws are when it come to Options and ETFs, and why you cannot rely on your broker 1099-B for proper tax treatment: Tax Treatment Can Be Tricky With Options and ETFs.

Cost basis for securities acquired prior to 2011 is not required on 1099-B.
Some brokers provide this information, most do not.

Who is Responsible for Accurate Reporting of Trading Gains & Losses?

The IRS has always, and continues to, place the burden of accurate tax reporting ultimately upon the taxpayer, as is evident by the requirement for
brokers to include a reminder to taxpayers that they are ultimately responsible for the accuracy of their tax returns (Pub. 1179 4.3.2).

The Information Reporting Program Advisory Committee noted this problem in their 2009 report to the IRS stating: "Since it is impractical to
require that financial institutions be responsible for tracking all possible events and taxpayer-level elections that affect basis, financial
institutions should be treated as passive repositories of basis information, rather than guarantors as to its accuracy." (IRS Notice 2009-17).

What Gets Reported on Form 1099-B?

A separate Form 1099-B is provided by a brokerage or barter exchange to the IRS and to the taxpayer (client).
The actual
IRS form 1099-B is a triplicate form containing about 30 different boxes for reporting and looks more like a W-2 provided by employers.
However, most traders and investors do not receive their 1099-B in this format because it would entail a separate form for each transaction.
Instead, the IRS allows brokers to report 1099-B details in a substitute statement. Often this statement will also include other reporting
from the broker such as 1099-INT, 1099-DIV, and 1099-OID.

Sale Proceeds

In general, brokers report all proceeds for sales of stocks, bonds, and commodities. They also report the proceeds for regulated futures contracts, foreign currency contracts, and forward contracts on an aggregate basis.

Brokers do not report sale proceeds for option trades in the 2013 tax year. In the future, the IRS will require brokers to report some options transactions.

Cost Basis

Brokers are required to report cost basis for covered securities. Covered securities are determined based on (1) the type of instrument and (2) the date the security was acquired. In general, the following are covered securities:

TYPE OF SECURITY:

ACQUIRED ON OR AFTER:

Equities (Stocks and Bonds)

January 1, 2011

Mutual Funds, ETFs, and Dividend Reinvestment Plan (DRPs)

January 1, 2012

Options and Less Complex Fixed Income Securities

January 1, 2014

More Complex Fixed Income Securities and Options Issued as Part of a Fixed Income Security

January 1, 2016

There are exceptions that apply in certain circumstances. And there are also varying interpretations of IRS requirements by some brokers.

Layout of 1099-B Statements

Active traders typically receive 1099-B substitute statements. The format and layout of substitute statements can vary greatly
depending on the broker. In 2012, the IRS outlined some rules to make those statements more consistent and user-friendly.

Starting with the 2012 tax year, the 1099-B statement must segregate trades in up to five categories:

Short-term transactions in which cost basis is reported to the IRS.

Short-term transactions in which cost basis is NOT reported to the IRS.

Long-term transactions in which cost basis is reported to the IRS.

Long-term transactions in which cost basis is NOT reported to the IRS.

Transactions in which cost basis is NOT reported to the IRS and the holding period is unknown.

In each of the segregated sections, the broker must total sales price and cost basis known for the trades in that section.

Understanding 1099-B Columns and Boxes

1099-B substitute statements typically report key information in columns labeled to correspond with the box numbers on the 1099-B forms.

For each transaction the broker may report:

Box 1a - Description of Property - this box also includes the number of shares. This brief description may vary greatly. Some brokers use a full description of the stock, some use ticker symbols, some include quantities, some use CUSIP numbers, there simply are no standards.

Box 1d - Proceeds - this is the amount received from the sale less any commissions and fees.

Brokers are allowed to aggregate sales that occurred on the same calendar day for the same stock sold in a single order even though the sale may have been executed in differing lots and prices. This aggregation can make reconciliation with actual trade history very difficult. You may choose to notify your broker not to use this method.

If the proceeds have been adjusted for option premiums, this will be indicated in box 6. Brokers are not required to adjust proceeds for option premiums if the option was acquired before 2014. However, they are typically required to do so for options acquired after 2013.

Box 1e - Cost or Other Basis - this is adjusted cost basis, not the actual cost basis which may be reported on your trade history.

If a security is non-covered (see box 5 below), then the broker is not required to report the cost or other basis.

If the acquisition caused a wash sale which was reported on 1099-B, then the broker will adjust the cost basis by this amount. However, there is no type of indication on the 1099-B if the cost basis has been adjusted by a wash sale and the corresponding quantity of shares or amount. This makes verification of cost basis nearly impossible.

Brokers are required to account for option premiums in determining the basis of shares acquired by exercising an option if the option was acquired in 2014 or later. If the option was acquired before 2014, then the broker may choose to account for option premiums at their discretion.

Brokers are allowed to aggregate cost basis of shares purchased on the same calendar day for the same stock in a single order even though the trade may have been executed in differing lots and prices. This aggregation can make reconciliation with actual trade history very difficult. You may choose to notify your broker not to use this method.

Box 1f - Code, if Any - here the broker reports the corresponding code. For example: "W" for wash sales, "C" for collectibles, and "D" for market discount.

If a security is covered, then the broker must report basis to the IRS. If a security is non-covered, they are not required to report basis to the IRS, but may choose to do so (in which case they will check Box 3).

Brokers who provide substitute statements are required to segregate the 1099-B data based on whether cost basis is reported or not.

Box 6 - The broker will indicate whether the proceeds are Gross or Net. This can be confusing, based on the instructions:

Gross proceeds has been adjusted for commissions and fees related to the sale.

Net proceeds indicates the amount has also been adjusted for option premiums.

Other less common 1099-B boxes / columns are:

Box 7 - Check if Loss Not Allowed Based on Amount in Box 1d - This box has to do with acquisition of control or substantial change in capital structure. See the 1099-B instructions for more details.

Boxes 8 to 11 - these boxes are used to report Section 1256 contracts. This information is typically reported in a separate section of the 1099-B statement from brokers.

Box 13 - Amounts received by a member or client of a barter exchange.

Boxes 14 - 16 - are used when State taxes are withheld

Additional Reporting Provided on 1099-B Substitute Statements

Brokers may provide additional information in conjunction with the 1099-B substitute statements, some of which may not be reported to the IRS. For example: many brokers will provide proceeds and cost basis for options trading, which is not reported on 1099-B or provided to the IRS. Some brokers also include realized gain/loss reporting either separately, or in conjunction with 1099-B reported details. This additional reporting may be helpful to active traders, but should not be confused with the information actually reported to the IRS.

How to Use 1099-B Reporting

Ideally, taxpayers would be able to take broker-provided 1099-B reporting and use the information to create their Forms 8949 and Schedule D.
In fact, this was the ideal of congress when they passed cost-basis reporting legislation. Unfortunately, current 1099-B reporting and regulations are woefully inadequate.
In fact, we have published a 25-page special report entitled The 1099-B Problem.

Our special report explains why active traders cannot use the 1099-B to complete Form 8949; the primary reasons:

The 1099-B reports limited wash sale adjustments using different requirements than those for taxpayers.

There are many documented errors, inconsistencies, and anomalies in 1099-B reporting provided by brokers.

The 1099-B reporting usually cannot be verified for accuracy - a vital principle in accounting.

Reconciling 1099-B

TradeLog software includes a process for reconciling imported trade history with 1099-B gross proceeds. Reconciling proceeds allows taxpayers to verify that their trade history is complete, resulting in accurate Form 8949 reporting. Most active traders are able to verify and reconcile, at least in aggregate, the sale proceeds on the 1099-B.

Reconciling cost basis reported on 1099-B with actual trade history can be impossible in many cases. As explained in our special report,
The 1099-B Problem, the information reported on the 1099-B lacks the detail needed in order to reconcile line-by-line with trade history reports or monthly statements. If a taxpayer cannot reconcile 1099-B cost basis with their actual trade history, then they cannot rely on that cost basis for generating accurate Form 8949 reports. For this reason, thousands of active traders, as well as leading trader tax CPAs, use the actual trade history to generate their tax reporting with TradeLog software.

Beware of Popular Tax Software Programs That Rely Solely on Broker 1099-B Reports

Some popular tax software programs claim to provide the ability to import your broker’s 1099-B data in order to generate Forms 8949 and Schedule D.
There are a few facts active traders should be aware of, and questions that result:

There is no IRS standard for providing 1099-B data in a digital format. Since brokers are not required to report all cost basis information on 1099-B,
how do these tax programs generate complete tax reporting?

Most popular tax software programs were designed for average Americans - not active traders. Active traders deal with some of the most complex IRS reporting requirements and therefore need to use software designed especially for them.

Why Active Traders Use TradeLog

TradeLog is software designed specifically for producing accurate tax reporting for active traders. TradeLog utilizes proven methods to generate Form 8949 reports that reconcile with broker-provided 1099-B. Learn more about why active traders use TradeLog.

For over 10 years TradeLog software has generated accurate trader tax reporting for Schedule D. TradeLog imports actual trade history from online brokers, then matches and adjusts trades according to IRS rules for capital gains and losses and wash sales - using the rules for taxpayers. TradeLog includes a process for reconciling imported trade history with 1099-B gross proceeds in order to verify trade history and produce accurate Form 8949 reporting.

Please note:
This information is provided only as a general guide and is not to be taken as official IRS instructions.
Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice.
You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.